The privatisation process is beset with mounting
difficulties, delaying strategic sale of sinking state-run units. In the
absence of any meaningful rehabilitation programme, or none at at all —
as in the case of SME Bank Ltd — the plight of the public sector
enterprises earmarked for privatisation has become a major national
concern.
The SME Bank was set up since commercial banks
were, and still are, shy of lending to small enterprises. Small and
medium sized businesses were clubbed together to make this specialised
banking viable.
The bank, awaiting strategic sale since
2016, has been denied equity capital for making fresh investment to
upscale its operations. Policymakers have ignored the problem that a
business stagnates if it is not allowed to grow.
In the
annual balance sheet 2016, the bank’s board of directors noted that the
management was finding it ‘very challenging to operate the bank on a
self-sustaining basis’ owing to a ’narrow equity base’ and ‘constraints
on business expansion’ imposed by the State Bank.
For
more than a decade, the bank has continued to operate with a network of
13 commercial branches and five recovery offices. According to the
balance-sheet its net liabilities were equal to its net assets. SME Bank
President and CEO Ihsan-ul Haq says the bank’s limited outreach
threatens its viability.
In its report, credit rating
agency, Pacra, which assigned the bank’s short-term rating of B (single
‘B’), pointed out that the sustainability of the bank’s operations is
dependent upon injection of equity capital by the primary sponsor. The
government’s stake accounts for 93.89 per cent and the rest is shared by
commercial banks.
Policymakers have ignored the problem that a business stagnates if it is not allowed to grow
As far back as October 7, 2009, a meeting of the
shareholders had advised the bank management to raise the paid up
capital and increase the number of its branches. But the Ministry of
Finance has not responded positively to the bank’s repeated requests on
the two proposals.
The paid up capital is stuck at
Rs.2.39 billion; the minimum capital required by the regulator, if
complied with, should have been Rs10bn.
The bank now enjoys an extended exemption granted by the State Bank.
The
bank is also exempted from the implementation of Basel II and III till
its ‘rehabilitation and privatisation’ due to a large investment
required in software, human resource, training, etc.
There
has been no notable progress in privatisation either. The first attempt
at privatisation was initiated in 2007; in 2008, 18 expressions of
interest were received. Short-listed companies/firms were in the process
of due diligence when the central bank raised the minimum paid up
capital requirement for all banks to Rs23bn net of losses. That
seriously affected the feasibility of sales’ transactions. Potential
investors lost interest in the proposed deal and the government
suspended the transactions.
In order to attract strategic
investment, according to press reports, a buyer may be offered a new
specialised banking licence at a reduced minimum capital requirement of
Rs6bn with staggered payments over five years: Rs2bn in the first year
and the rest over the next four years. But the buyer will not be
eligible to any dividend until the entire amount is paid.
Any
prospective buyer has to think twice before entering into an area of
business where major commercial banks move cautiously or fear to tread.
Currently the banks’ focus is on financing the corporate sector, foreign
trade and investment in government papers. The buyer would probably
look at the potential business volume from medium sized enterprises and,
like its peers, prefer to largely ignore the small businesses.
The
privatisation process for the SME Bank was re-initiated after seven
years in 2015 and is still some difficult steps away from any final
transaction. Since nearly the last decade or so, the country’s
privatisation process has received a setback for a variety of factors:
pro-active interventions by the Supreme Court, resistance of PPP and the
organised labour, and lukewarm response of the investors. Restructuring
efforts have so far have also not yielded any positive result.
In
the past, privatisation process was successful because of two major
reasons: all sold units were profitable and the size of investment was
within easy financial reach of the domestic private sector.
The
UK showed that it was easier to sell profitable units; Ms Thatcher
rehabilitated state units before selling them. The sale of state-owned
banks was managed with the financial and technical assistance provided
by the World Bank. It was also easier to disinvest government shares in
privatised commercial banks.
Private investment is
propelled by business opportunities, offered by the domestic-driven
economic growth. Barring the Chinese, both foreign and domestic
investors are currently focused on consumer goods industry and
businesses. It is difficult to find strategic buyers for sinking
organisations with rising viability risks and huge investments involved
for a turnaround.
